Articles Posted inProvident Asset Management

My California securities law firm has been inundated with inquiries from small investors who were sold unregistered private placements even though they were clearly not wealthy or financially sophisticated. Some of these private offerings–such as those issued by Medical Capital Holdings and Provident Asset Management–turned out to be outright frauds.

The private placements that are causing the most trouble were widely sold by stockbrokers who were only allowed to target wealthy individuals that have the financial capability to bear the risk of investing in unregistered and illiquid securities. These qualified investors are referred to as “accredited investors” under the federal securities laws. As discussed in a previous blog posting about accredited investors, an individual will be considered “accredited” if they have a net worth of $1 million or an annual income in excess of $200,000 (or $300,000 when combined with a spouse). The financial threshold for “accredited investors” was established under “Regulation D” which was adopted back in 1982. These requirements have not been updated since they were implemented 28 years ago. According to an analysis conducted by Businessweek, if adjusted for inflation, the accredited investor net worth requirement would increase from $1 million to $2.25 million and the income requirement would increase to $449,000 (single) and $674,000 (married). It is estimated that there were approximately 1.5 million “accredited investors” back in 1982. By 2008, the estimated number of households that were “accredited” swelled to as much as 7.2 million.

With such a low barrier to entry, many small investors were allowed to unwittingly put their retirement savings at risk–often lured by assurances from their stockbroker of high returns, safety and liquidity. An increase in the accredited investor qualification requirements is necessary to curtail the sale of private placements to individuals who can least afford to lose their investment.

The Bay State has stepped up its investigation into the fraudulent sale of private placements by securities brokers. Today, the Massachusetts Securities Division announced that it issued 6 subpoenas to National Securities; QA3 Financial; CapWest Securities; Independent Financial Group; Investors Capital; and Centaurus Financial seeking information related to the sale of Medical Capital Holdings Inc. and Provident Royalties. Earlier this year, the Commonwealth of Massachusetts filed a securities fraud lawsuit against Securities America charging the firm with misleading investors in the sale of Medical Capital Notes. [See Massachusetts Regulators Charge Securities America With Securities Fraud]

Although the Commonwealth of Massachusetts is primarily concerned with the sale of Provident Royalties and Medical Capital Notes to residents of that state, the fraudulent sale of risky private placements has affected thousands of investors across the nation and is now the subject of intense scrutiny. Several of the brokers that were subpoenaed by Massachusetts have been subjected to an influx of customer arbitration claims and securities class action lawsuits. [See: Medical Capital Class Action or Arbitration: Investors Should Consider Their Options and related blog postings discussed therein.]

The Financial Industry Regulatory Authority (FINRA) has finally expelled Provident Asset Management for committing outright securities fraud in a Ponzi scheme that involved the marketing of a series of private placements under the names “Provident Energy” and “Shale Royalties.” In typical FINRA-fashion, the expulsion was accomplished through a settlement in which the firm neither admitted nor denied any wrongdoing. FINRA’s expulsion did not come about until more than 6 months after the Securities and Exchange Commission filed a securities fraud lawsuit against Provident Asset Management in July 2009 and Provident Royalties, LLC filed for bankruptcy in June 2009. Meanwhile, FINRA also announced today that their head of enforcement, Susan Merrill, is stepping down to return to private practice.

According to FINRA, the self-regulatory agency is conducting a broader investigation into the more than 50 broker-dealers who sold the Provident Energy and Shale Royalties private placements to their customers, which may lead to more settlements and potential fines. Disgruntled investors have already begun filing securities arbitration claims against some of these broker dealers alleging unsuitability, fraud and misrepresentation.

For more information, please visit the following recent blog postings:

In my California-based securities law practice, most of my clients that own a home qualify as “accredited investors” within the meaning of Regulation D which exempts private placements from federal securities registration requirements. Rule 501 of the Securities Act of 1933 defines an accredited investor as any person with a net worth (or joint net worth with a spouse) in excess of $1,000,000 at the time of purchase.

Financial advisors or stockbrokers who sell private placements are subject to the rules and standards promulgated by the Financial Industry Regulatory Authority (FINRA). According to FINRA, stockbrokers who act as selling agents for private placements are required to conduct a due diligence investigation of the offering so that they understand the nature of the investment and its risks. Also, before recommending a private placement to a particular customer, the stockbroker must perform a suitability analysis by examining the customer’s overall financial situation and investment objectives. Because a home can represent an investor’s largest asset, net worth alone should never be used to determine whether an investment is suitable. A customer’s status as an accredited investor does not release a stockbroker from the suitability requirements.

Recently, there has been a surge in investor complaints involving private placements that were sold by broker-dealers who were acting as selling agents. Private placements that are creating a lot of investor complaints include: Medical Capital, IMH Secured Loan Fund, Provident Asset Management, Striker Petroleum and DBSI. Some of the broker dealers who actively sold one or more of these private placements are Securities America, QA3 Financial, National Securities, CapWest, Independent Financial Group, just to name a few. Please contact us if you have any questions about unsuitable private placements.

On February 26, 2010, the Chapter 11 trustee for the Provident Royalties LLC, et al. bankruptcy matter submitted a proposed plan that would, among other things, ask investors to assign any rights they may have against third parties such as stockbrokers who made unsuitable recommendations to invest in securities offered by Provident Royalties and Provident Asset Management. The proposed liquidation plan asks investors to assign to the Liquidating Trustee all claims against third parties who may have committed acts which make them liable under contract, tort, general corporate or securities laws to the individual Investors. Individual holders who vote “yes” will automatically assign all of their claims. The proposed Liquidation Plan also contains an “Opt-Out Election” for investors who feel that they may be better off pursuing an individual claim rather than a group claim.

To further complicate this situation, brokerage firms Next Financial Group, Inc.; QA3 Financial Corp.; and Securities America, Inc. are already embroiled in a putative class action lawsuit for their role as selling agents in the Provident Energy and Shale Royalties securities offerings. Investors who choose to do so, can also opt out of the class action.

In other words, investors who purchased Provident Energy and Shale Royalties interests currently have three alternate ways to recover their losses from stockbrokers: (1) approve the pending Chapter 11 liquidation plan; (2) participate in the putative class action (assuming they were customers of the above class action defendants); or (3) opt out of both and pursue an independent securities arbitration claim. The first two options are still awaiting approval from the court. The third option, securities arbitration, is immediately available. Although every individual investor’s situation is different, opting out of a group claim may make more sense when the investor has a particularly meritorious claim or when there are additional unsuitable investments involved that are not covered by any of the group claims. Before making a decision, investors should explore each of these options with a great deal of care.

The Alcala Law Firm was recently contacted by several California investors who invested in the IMH Secured Loan Fund, LLC, a private placement managed by Scottsdale based Investors Mortgage Holdings, Inc. The Financial advisors who sold the IMH Secured Loan Fund to these investors also sold them other private placements, including Medical Capital and Provident Asset Management, two speculative investments that turned out to be ponzi schemes and are now the subject of numerous securities fraud lawsuits.

Before recommending any investment, particularly risky and speculative private placements, financial advisors have a fiduciary duty to adequately disclose the risks involved and also to exercise due diligence in determining whether such investments are suitable for the customer. The Alcala Law Firm is in the process of investigating the possibility of filing securities arbitration claims before the Financial Industry Regulatory Authority (FINRA) to recover investment losses related to these private placements.

Striker debentures can now be added to the growing list of private-placement offerings that were marketed through a network of stockbrokers that have recently become embroiled in securities fraud lawsuits. This week, the SEC alleged that Striker Petroleum, LLC deceived approximately 540 investors into purchasing $57 million worth of fraudulent debentures. The SEC is alleging that Striker was selling the debentures to pay off prior debenture holders and to pay fixed returns to investors who had invested in Legacy oil and gas properties.

According to one industry news source, the Striker debentures were sold through a nationwide network of stockbrokers, including CapWest Securities. As a result, many investors who purchased Striker debentures may also have been sold interests in Provident Asset Management and Medical Capital–two private placements that are already the focus of SEC and investor lawsuits. As we noted in a recent blog posting on this very subject: Brokers who recommended these investments have a lot of explaining to do.

Since my last two blog postings about the Medical Capital securities class action lawsuits pending in California, I have heard from several investors that were defrauded into purchasing not only Medical Capital Holdings, but also Provident Asset Management. Brokers who recommended either one of these private placement investments have a lot of explaining to do. Before recommending any investment, brokers have a fiduciary duty to exercise due diligence in determining whether an investment is appropriate and suitable for their customer. Defrauded investors interested in recouping their investment losses should consider all of their legal options, including the filing of a securities arbitration claim against their stockbroker or investment advisor that recommended the investment.

Below is a brief overview of the Provident Asset Management and Medical Capital securities fraud matters.